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Sunday, 7 June 2015

ECONOMIC DEVELOPMENT MODELS AND CAPITALISM

The question of "Development Models"
In the post-Communist era now more than two decades old, many people around the
world are questioning what is the best economic development model? One reason
for such a question is the very deep recession of 2008-present that has thrown
many economies into a downward spiral of unemployment, rising public and
private sector debt, and lack of rapid growth in the remainder of the
decade.So, what are some models of
modern economic development and to what degree do they improve people's lives,
and do economic growth and development alone account for human happiness - with
the broader meaning of the latter term?

The mode of production that determines the social order has been capitalism that
has evolved from the Commercial Revolution in the 16th century to globalization
in the late 20th-early 21st century. Under the world-system of capitalism,
there have been different models of development in the history of capitalism,
determined to a large degree by the shifts from the primary sector of
production (agriculture, forestry, mining and fisheries) to the secondary
sector (manufacturing) and to the tertiary (service) and high
tech/biotechnology sector.

Before analyzing some models of economic development, it is instructive to
consider the following questions about “development economics”.
a) What development model best serves the needs of the people, presumably all
people and not just the financial and or political, military, bureaucratic elites?
b) Is it possible to separate politics from economics and speak in terms of
pure economics instead of a system of political economy and social structure?
c) Is there such a thing as "the perfect" or 'ideal' system that can
be applied perfectly in practice as it may appear in theory, whether such a
system is market-based, statist, or some model based on a mixture?
d) Different countries would require to adopt variations of different models
depending on their natural resources, labor force, level of current
development.
e) Change is required to models of political economy to keep up with changes in
the real economy and society."
f) As perfect as they may be in theory for any given society, economic
models in practice do not mean very much, simply because the decision on what
policies to pursue are always taken by those who command economic and political
power. Add to the equation the factor of corruption and the model is coffee
table reading material.
g) There is no such thing as the ideal model in theory that is not in practice
a mixture of several theories. For example, is the US a "free market
model" economy when in essence it has been practicing corporate welfare
economics for decades? Is Indonesia a neoliberal economy under an Islamic
regime, similar to Malaysia, Turkey, and now Egypt and Tunisia? Is China a
statist economy or a mixed economy that allows a heavy dose of free enterprise?

Can
there be a development model that serves all people based on social justice?
In the 19th century, there were a number of intellectuals from Adam
Smith to Karl Marx who believed that it was possible to have an economic system
that best served all people. However, Smith was an advocate of free market
economic development, while Marx believed only Communism, the natural state of
human beings, can best serve the people by eliminating elites, not reinforcing
them.

Because people have differing views on what best serves society, that is, best
serves every person equally in every respect in institutional terms, most economic
models are necessarily based on what best serves interest groups within
society. There are of course economic development models that claim to best
serve everyone, including Socialist and Communist models, but in practice some
sectors and some individuals are better served even by those models, as history
has clearly demonstrated in the 20th century, than other groups in society. In
short, as Jean-Paul Sartre and many others correctly maintained, there will
always be elites in society, and that means that no economic model can possibly
be free of that reality. Another way to view this is that there is no such
thing as an economic development model that is "objective", because
models are rooted in everything from investment to terms of trade that invariably
benefit certain groups and not society as a whole.

Should GDP growth be the sole criteria for human happiness?
It is true that in world public opinion polls the top ten "happiest
countries" are those that we consider developed economically, that is,
those with diversified economies and high incomes. This is an indication that
in the age of materialism where the value system is rooted in wealth and the
security provided to maintain it people believe their happiness hinges on
things associated primarily with material possessions. However, national
economic growth and development do not necessarily translate into individual
happiness, if a percentage of the population, anything above 10%, lives in
chronic poverty.

Moreover, human happiness is also predicated on spiritual fulfillment for many
non-Western societies. In the early 1970s, Bhutan rejected GDP as the sole
criterion for progress, asserting that quality of life, social progress and the
psychological well being of people are significant indicators to take into
account. The Bhutan example became the UN standard as well. Although this is
something that can be used as distraction by those trying to justify
socioeconomic injustice by arguing why do people need material improvement when
they have spiritual fulfillment, it is important to note that we cannot use the
Western material criterion alone for it does not reflect the human experience
worldwide.

Defining "Development"
The term development in economics does not mean the same thing for an advocate
of "dependency theory" as it does for a monetarist. Nor does it
necessarily mean the same thing for an advocate of sustainable development in
India vs. one in Canada. For this reason, I need to lay some groundwork for
this synoptic perspective of what the term means to intellectuals and
politicians who do not share common views.

1.
Centrally-planed models.
The old Soviet centrally-planned economy from the 1920s until the early 1980s
was a model in which the command economy was rooted. The government decided on
productivity and investment by sector as well as absorption of the surplus
labor force from one sector by the other, not to satisfy consumer demand, but
rather to meet the greater societal or national needs as the state defined
them. In varying degrees, this model became a prototype for Eastern Europe
after 1945, and for Cuba, Vietnam, North Korea, and China under Mao.

Development was measured by the state in terms of meeting production quotas,
though in practice, the bureaucracy falsified reports to make productivity
appear much better than it was. In the end, such a non-consumption-geared
economy did not translate into rising living standards across the board, but it
did absorb the surplus labor force and it tried to meet essential needs such as
housing, health, and education. Command economies had enormous problems, not
only because their civilian economies failed to meet mass consumer demand, but
also because of the emphasis on durable goods focus vs. consumer goods, and
heavy military spending that absorbed resources otherwise needed for the
civilian economy. In practice, the politically-connected elites (the 'new
class' linked to the Communist Party) benefited, while the broader masses
lagged behind and lacked basic freedoms that many of them valued, such as
freedom of worship, expression, and others that are common in open societies of
the Western World.

2.Quasi-statist and neo-corporatist models.Government permits free enterprise, but invests heavily in certain
industries and/or subsidizes others even if they show chronic deficits instead
of profits, because it deems it is in the 'national economic' interest. It is
difficult to argue that quasi-statism and neo-corporatism, both of which are
inter-related and have many aspects to them, are alike in South Korea as in
Brazil, or in Russia as in Argentina and Venezuela. The common denominator is
heavy government involvement in investment with the intent to promote certain
sectors, trade regulation intended to promote national capitalism and not permit
international capital to determine economic planning, and strengthening the
state structure so that the private sector, especially foreign capital does not
have a dominant role.

After the Second World War, a number of countries, including Japan, South
Korea, Taiwan, among others, began to adopt 'top-down' development models so
they can help build sectors such as steel industry, shipbuilding, and others.
This model in varying degrees found expression in Brazil, Argentina after 2001,
post-Communist Russia, even Spain in the late 1980s-early 1990s before the wave
of neoliberalism swept the EU that had itself aspects of corporatism and
quasi-statism as a regional bloc rooted in heavy subsidies of certain sectors.

The quasi-statist model is also operating in a number of countries as different
as Norway and Saudi Arabia. There is the Norwegian development model, (to some
extent also practiced in other Scandinavian countries) essentially a variation
of Keynesian economics, is rooted in a strong state structure that relies on a
solid welfare state with a private competitive sector backed by the
social-democratic state.
The benefits of this model are that there is a sense of national control over
the economy, vs. foreign capital control, thus it is an issue of national
sovereignty prevailing in the age of globalization. Another benefit is that the
state helps to plan for the country's future with the intent of long-term
development that presumably would meet the needs of the majority of the people.
Moreover, the nation retains a strong national capitalist class that is able to
compete internationally instead of becoming subservient to exporters from
developed core countries.

How well has this model worked? The examples of South Korea, Taiwan, all of the
BRICS (Brazil, Russia, India, China and South Africa) indicate that the
national economies experience phenomenal growth. This does not mean, however,
that the wealth is evenly spread across the population.It is true that South
Korea, and Taiwan developed a middle class on the basis of this model and it is
also true that the fastest middle class growth is taking place in the BRICS.
However, the world's largest percentage of poor live in the BRICS. With the
promise that national economic growth and development will some day in the
future translate into individual prosperity the quasi-statist countries can
continue to operate as they do until such time as the broader masses rise up
and demand results filter down to them.

3.
Neo-classical (free enterprise) model.
The classical free enterprise system theory of Adam Smith and its apologists in
the 20th century, from the neo-classical advocates (Robert Solow and T. W.
Swan) to Milton Friedman and the Chicago School that rejected Keynesian
economics in favor of rigid monetarism that is an integral part of the
neo-classical movement. Productivity and capital accumulation based on a fiscal
system that favors capital, allows maximal freedom of capital movement and
investment and limits organized workers' rights that inhibit capital expansion
and accumulation are at the core of this school of thought.

With many variations, the neo-classical school and its advocates ranging from
supply side economics to neoliberalism and monetarism as expressed by IMF-World
Bank economists as well as purists of the classical theory made a major
comeback in the 1980s and they have triumphed ever since. In practice, the
theory never worked as its advocates claim, because the state became a vehicle
to transfer massive income from the welfare state to corporate welfare, thus a
form of statism was part of this model. Moreover, the model in practice proved
to have many flaws as it permitted numerous scandals from banking to corporate
corruption and investor fraud on which fortunes of the very few were built at
the expense of the general economy.

The market-oriented growth and development model is presumably one that takes
place under an open, free and democratic society where free market forces
trade, invest and consume with minimal government intervention. This is the
theory. In reality, the role of government is very heavy in every aspect from
monetary to fiscal policy, and society is not nearly as free and open as one
would argue in theory. The quasi-police state methods of the US, everything
from illegally tapping into the private phone records of millions of people to
denying due process to anyone that government has the right to brand terrorist
indicate a slippery slope toward authoritarian capitalism. "The
National Security Agency and the FBI are tapping directly into the central
servers of nine leading U.S. Internet companies, extracting audio and video
chats, photographs, e-mails, documents, and connection logs..."

Putting aside the reality that economic models necessarily work within a
political system that makes all kinds of lofty claims about what best serves
"the people", let also consider that many people actually believe
that if the "national economy" is performing well, so will they,
because they identify with the nation-state, even though they as individuals
may be in the lower socioeconomic strata and derive no benefits from any growth
and development. This is the case in many countries, most notably the US. The
latest (June 2013) Department of Labor report shows that labor costs are the lowest
since 1947 when the US began keeping records. Hourly compensation continues to
sink, most notably in the manufacturing sector that was historically the
best-paying sector for workers. This trend of downward socioeconomic
mobilization has been a reality for the past three decades, but the US economy
continues to develop and grow, though without such development translating into
income growth for the middle class and workers.

There are variations of authoritarian capitalist models found in many non-Western
countries such as Saudi Arabia but also in a number of African nations. This
model allows for free enterprise, it rests on one or very few sources for
economic growth and development, and it has a strong state monopolized by
authoritarian regimes, invariably more corrupt than countries where there is
some semblance of checks and balances. There is the Indonesian, Malaysian,
Turkish model of neoliberalism under Islamic regimes; something that is now
spreading across other Muslim nations, including Tunisia and Egypt. This model
is an integral part of the neoliberal one under globalization.

Clearly, there are models today that result in tremendous GDP growth, but that
does not translate to upward socioeconomic mobility and the qualitative and
quantitative growth of a middle class. For example, the result of
globalization, especially from 2007 to the present, is that the middle class in
the US and EU has been shrinking, while it has expanded in Asia and to some
degree in Latin America and parts of Africa. Therefore, versions of the
neoliberal model of development that the US and EU have been pursuing has
resulted in downward socioeconomic mobility for the most advanced nations as
well as semi-developed ones in Southern Europe. Nevertheless, more than half of
the middle class in in North America and EU, while the vast majority of the
poor are in the non-Western world.

According to OECD statistics, "In 2009 the middle class included 1.8
billion people, with Europe (664 million), Asia (525 million) North America
(338 million) accounting for the highest number of people belonging to this
group. ... The size of the “global middle class” will increase from 1.8
billion in 2009 to 3.2 billion by 2020 and 4.9 billion by 2030. The bulk of
this growth will come from Asia: by 2030 Asia will represent 66% of the global
middle-class population and 59% of middle-class consumption, compared to 28%
and 23%, respectively in 2009..."

One paradox in economics is that it is possible to have growth without
development (vertical growth), or growth accompanied by underdevelopment as in
the case of African, Latin American and some Asian countries that are relying
on one or two export products, while using the proceeds to import everything
else. This kind of dependency has been characteristic of the core-periphery
divide in the capitalist world system for the past five centuries; for there is
a vast difference between an undeveloped country enjoying self-sufficiency and
an underdeveloped that one that is financially, commercially and industrially
dependent on the advanced capitalist (core) countries. Moreover, there is a
vast difference between a country experiencing ephemeral growth owing to the
availability of some export product –let us say oil – and sustainable
development that leads to diversified economic development and greater
self-sufficiency.

Alternatives from the
Interwar: Keynes and Polanyi

The IMF, World Bank, US
Federal Reserve, European Central Bank, OECD, banks and corporations, the media
and governments have been arguing in the last three decades that there is no
alternative to neoliberal policies that have been followed religiously in the
postwar era, especially from the Reagan-Thatcher era to the present. The idea
that “there is no alternative” to an economic development model implies that
God handed it to a prophet down here on earth and all the faithful must obey it
in the same manner they observe religion, otherwise they are sinners and must
be demonized. Is there anything sacred about the neoliberal model that emerged
in Europe during the 1930s but exploded in the 1980s? Is the market system
above history, one that always existed, and “natural” thus compatible to human
nature and society because it serves people’s interests? Two interwar
economists certainly felt otherwise, namely Keynes and Polanyi, though they did
not agree on the alternative development model.

In the classic
study of capitalist political economy undergoing rapid change during the Industrial
Revolution, Karl Polanyi, argued that the “market system” is hardly the norm in
human civilization, but instead the exception. “Previously
to our time no economy has ever existed that, even in principle, was controlled
by markets . . . gain and profit made on exchange never before [the nineteenth
century] played an important part in human economy.” (The Great Transformation: The
Political and Economic Origins of Our Time. 1944).

Polanyi’s study
points to capitalism as a cruel system that generates “market efficiency”
translated into greater concentration of capital at the expense of creating
greater misery among people. It is true that this work comes from the
experiences of a European intellectual who lived during the Great Depression
and saw Europe destroyed during the Second World War. Polanyi was a
contemporary of John Meynard Keynes whose economic development model (in the
form of the New Deal in the US) was intended to “save capitalism” from its
predatory self-destructive tendencies through reforms that entailed deficit
financing and greater statism that would act as a pillar of the fragile system.

Unlike Keynes,
Polanyi was not interested in saving the system that dehumanized society
because it was predicated on uneven and unequal development. Whereas neither
Keynes nor Polanyi trusted markets to go unchecked, Keynes wanted the state to
play the catalytic role as arbiter so they may thrive and at the same time make
sure there is a social safety net that in essence acts both to stimulate the
economy through consumption. This would ensure a broad popular base of support
for the political system under which capitalism operates. Market manipulation
by capitalists necessarily entails rationalizing the system with the state’s
regulatory intervention has its limits. Polanyi opted for a clean development
alternative that did not aim at saving markets but people, because the goal of
markets is indeed to serve the people not to perpetuate themselves through
capital concentration and centralization.

While it is understandable that capitalists would have nothing but contempt for
Keynes and Polanyi, politicians, the media and many mainstream economists and
social scientists followed the lead of the markets. This is not just because
there is no reward criticizing those who money and power, but also because the
neoliberal model appeared to be gaining ground largely owing to the political
failures of Soviet Communism and China’s embrace of capitalism. In short, the
markets triumphed, therefore why not let them loose, give them all they want,
everything from utility companies and government contracts, to direct subsidies
and tax breaks. In the last two decades or so, there have been some who have
dared to question the neoliberal model and even bring the works of Keynes and
Polanyi.

I do not believe that history
repeats itself because it is like a river where the same water is never there.
However, the similarities of our times with the Gilded Age (1870s-1900) and
with the 1920s are rather striking, especially since we have a decentralized
political and economic power structure with East Asia increasingly playing a
role in determining global affairs. At the same time, the dwindling middle
class in the Western World and the rise of social unrest in many parts of the
world has many people wondering about the breaking point in the political
economy. While a dose of Keynesianism is always an option for governments in
the future that run into sociopolitical trouble, I believe that Polanyi’s
alternative of human-based economics is a model on which a real systemic
alternative could address social justice issues rather than glorifying market
strength for its own sake and to have a few dozen billionaires own as much
wealth as half of the earth’s population.

Conclusions

The idea that there is any
model that can possibly reflect "human behavior" and its
idiosyncratic proclivities assumes that there is such a thing as a
"uniform generic model" of human behavior, rather than "atomic
action constraints, as determined genetically and by cultural
conditioning". In fact, the reason I argue that there cannot be a perfect
model, is because I made certain assumptions about human nature, namely that
the irrational tendencies play a far greater role than the rational.

This is a very old argument
rooted in the philosophical debates that goes back to the 17th century (Hobbes
and Locke) and continuing in the Age of Reason as well as the 19th century when
Marx and Mill who relied on the rationalist tradition to formulate significant
political theories on which society could build. In short, just as a scientific
theory can provide solid and unquestioned answers, similar philosophical models
of political economy could do the same, at least this was the assumption. But
can scientific certainty be applied to economic models, given that they must in
the end apply to human beings that are neither neutrons nor algebraic
equations?

Are the domains of economics,
political science, sociology and social science as "scientific" as
mathematics, chemistry and physics, or are we ultimately dealing with a
question of societal structure based on a social contract? To what degree is
the social contract itself modeled after rationalist assumptions, as was the
case for both Jon Locke and Karl Marx and F. Engels, is a legitimate issue.
However, the matter of societal organization, mode of production, is subject to
historical dynamics (dialectical materialism, to be sure, but certainly not
limited to it).

Is there a single development
model that works best to serve the people of all countries around the world;
like us say the neoliberal that IMF, World Bank, European Central Bank, US and
EU governments are promoting globally as the panacea? Economic development
models, whether like that of the US, or regional bloc one like the one of the
European Union, are always designed down to the smallest detail to serve and
promote the privileged socioeconomic and political elites, within the
boundaries of what the middle class and working class will tolerate so there
would not be social unrest or revolt.

Development models under
capitalism are not intended to foster greater upward socioeconomic mobility,
but to further concentrate capital in the hands of the privileged elites that
enjoy policy influence. The social safety net, social welfare measures within
varying degrees that have been in place in many countries around the world are
now threatened by the neoliberal model that encourages the erosion of welfare
measures amid an era of downward pressure on wages and limited opportunities
for youth suffering high unemployment. These are explosive social conditions
that could result in social upheaval if the trend continues.

Lower global poverty, gender equality, basic education and health care, and a
sustainable future for all people are desirable goals of many human-centered
rather than market-focused people for the past two centuries. The question is
which development model can achieve such goals i9f the political economy is
structured to serve narrow class interests. Not any time in the near future, or
in the next half century do I expect systemic changes in the neoliberal
political economy. On the contrary, statistics indicate that there is
regression in the areas of social progress. Why? I repeat that people who have
economic and political (military/police) power always prevail, while the
broader masses of the population, middle classes and workers continue to demand
social justice. The social dialectic (Marxian-based "dialectical social
theory") leads me to conclude that concessions will be made to the broader
masses only when absolutely necessary to preserve the status quo.

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